AT&T Poised To Fulfill Ed Whitacre’s Vision? Charging Aps For Customers and The Future of Wireless.

It has been just over 6 years since Ed Whitacre, then CEO of AT&T, kicked off the Network Neutrality movement by famously declaring that rival services would not “use my pipes for free,” neatly side stepping the fact that customers were actually paying to “use [his] pipes” already. Because why just collect money from one side of a platform when you can collect the same money again from the other side? Well, it appears that AT&T may finally be on the verge of realizing Whitacre’s vision — at least for the wireless world. While details remain sparse, the Wall St. Journal broke a story yesterday that AT&T may “allow” application providers to pay the overage charges for customers who exceed AT&T’s arbitrary “bandwidth cap.” As my colleague John Bergmeyer pointed out over at Public Knowledge there is not much functional difference between simply charging both sides of the platform directly and giving you the first 2 GB/month and then charging you for access.

I first wrote about the problem of “Whitacre Tiering” (having a “slow lane” for the “public internet” and a “fast lane/Quality of Service (QoS)” for favored content) in the wireline context almost 6 years ago today, back when AT&T (and other supporters of such schemes) used “the exaflood” as the reason why we absolutely positively must charge service providers to reach broadband subscribers. Remember the “exaflood,” the prediction that our broadband systems would crash under the ever-rising flood of data as users, unconstrained by metered pricing, outstripped the capacity of broadband systems? Except, of course, it didn’t happen. Cable operators developed DOCSIS 3.0, DSL providers figured out how to do better, and those stuck with ruinous backhaul charges figured out other ways to manage their networks (generally in cooperation with users).

Moving to the wireless universe, we find ourselves with similar arguments that we faced six years ago — including the wireless version of the “exaflood.” Below, I consider whether the arguments for wireless make any better sense than they did when Whitacre proposed it for wireline back in October 2005.

More below . . . .

Just to be clear, here is what AT&T Wireless is doing:

1. Create an artificial scarcity with an arbitrary bandwidth cap for its wireless services;

2. Charge users who exceed this arbitrary bandwidth cap;

3. Claim to do consumers a favor by letting the ap developer pay for exceeding the arbitrary bandwidth cap.

Which cuts to the heart of the problem in wireless, IMO. The argument in favor of a wireless capacity cap is, in a nutshell, “wireless is different from wireline because the physics imposes bandwidth limitations.” In the presence of these bandwidth limitations, we need a rationing scheme of some kind. Bandwidth caps are a neutral way of rationing and encourage ap developers to write more efficient applications — thus improving the system overall.

The problem with this argument is it is impossible at present to determine just how true or false it actually is. I referred above to AT&T’s bandwidth cap as arbitrary. As far as I (or any outside observer) can tell, AT&T just selected a number and said “this is where we impose a cap.” You can buy a higher cap on a monthly basis, or can pay as you go above the cap in the form of overages.

As I first noted back in 2006, allowing a company to monetize scarcity creates an incentive problem. Why go to the expense of investing in capacity and improving your network when you can charge the other side of the two-sided platform and make money instead? Historically, we have two answers to that: 1) competition constrains the behavior of the platform operator, or 2) we regulate the prices.

As we all know, #2 is off the table. Heck, we can’t even get the FCC to ask providers how they calculate caps and how caps actually impact use or deployment plans — and Lord knows I’ve tried. This is also why AT&T’s analogy to 800 numbers fails. The 800 number system works in the context of an extremely regulated telephone system that includes things like publicly published tariffs approved (at least in theory) by regulatory agencies and subject to such statutory limits as “just and reasonable rates.” Please note I am not urging this kind of regulation. To the contrary, I can’t think of anything more likely to burden small providers and choke what pathetic competition we still have than a switch to regulated pricing. What I am pointing out is that you can’t pretend this is “just like 800 numbers” when a critical piece of what makes 800 numbers work effectively — regulation to make sure it is cost-based and administered fairly — doesn’t exist.

That leaves us with competition as the potentially restraining factor in giving AT&T (and the wireless companies that will follow this example) a free hand to do whatever it wants. However, as I’ve explained before, competition in wireless works in funny ways. Even if we stipulate that the existing wireless market is competitive (a matter of perennial debate), we face some unique hurdles with regard to data plans in particular. The first is that AT&T (and Verizon) control most of the special access backhaul companies need to move data from cell towers to the “Internet cloud.” As a result, if competition from other providers based on data caps prevents AT&T from getting the extra revenue from bandwidth cap overages it feels it deserves, it can jack up the price of needed inputs (backhaul) to competitors until they raise the price as well. The second problem is the problem of “switching cost.” If I get charged an early termination fee and have to switch from my current handset to something new, I am much less likely to switch even if someone else offers a higher bandwidth cap. I have to balance to cost of the bandwidth cap against the cost of switching.

Rewarding the Wrong Behavior?

The presence of switching cost raises a further policy problem in letting app developers pay for the bandwidth cap overages — it rewards the wrong behavior from a policy perspective. As a general policy matter, we want to see providers invest in their networks. A key reason for doing that is fear of competition. When AT&T’s network reached a certain level of awfulness, they needed to invest in things like wifi offload or risk losing customers despite the high switching cost.

Letting ap developers pay for overages allows AT&T to monetize scarcity and hide the true cost from consumers — reducing their willingness to switch to providers that actually invest in networks. Since you get what you reward, you will see networks adopt the “charge the ap developer” strategy rather than invest in networks. Indeed, allowing this kind of fee structure actually creates a disincentive to investment in the network. It is not that wireless providers won’t invest at all — there is only so much the ap developers can afford to pay and there are likely to be enough that can’t/won’t pay to require investment in capacity at some point — but it significantly delays the need to invest in network upgrades while significantly reducing the reward to competitors who do invest in network upgrades.

Finally, as I observed six years ago when I first began writing about this, an entirely unregulated scheme for charging non-subscribers in a non-transparent way is an invitation to the provider to pick winners and losers. This is how the cable industry historically exercised control over the programming market, by favoring content it owned over independent content. As a result, the cable programming market became highly consolidated with the modern system of dueling programming giants (Disney, Viacom, News Corp) v. Distribution Giants (Comcast, DIRECTV) and the few independents getting trampled when the elephants fight. This is not a system we should wish to replicate on the wireless Internet.

Which brings us to the final danger. As the line between wireless and wireline Internet access becomes blurred, it becomes easier for the handful of giant providers that cover most of the country to shape our expectations. We started with capacity caps in wireless. Then they moved into wireline. If wireless providers can establish charging providers of services as well as subcribers on the wireless network, what will prevent cable operators and other purely wireline providers from making the traditional “level playing field” arguments that they are entitled to the same revenue? Whatever the merits of the justification based on the physical capacity of wireless, they do not apply in the wireline world where one can lay fiber and upgrade capacity in other ways. Our national policy of shifting ever increasing amounts of economic and civic activity to broadband would suffer a significant reversal if providers had incentive to stop network upgrades and monetize capacity shortages by charging content and service providers.

Counter Arguments?

There are a few counter-arguments against the doomsday scenario. Existing competition in wireless may, in fact, prove robust enough to prevent abuse. Reliance on open spectrum (such as Wi-Fi hot spots or home networks) to avoid capacity caps may also provide a check on the system. Few ap providers may be willing (or able) to pay the overage charges, and even these ap providers would need to offer desired services. To use the 800 number analogy again, while the use of an 800 certainly helps businesses dependent on telephone orders compete, many businesses — such as your local take out place — manage without one.

Finally, there is always the possibility that AT&T and the other advocates of “wireless is different” may be right — at least to some degree. While just about everyone not trying to raise wireless prices directly or indirectly agrees we can do a lot more to improve the efficiency of wireless networks, and I believe we have barely scratched the surface on how we can use spectrum more efficiently to enhance competition, there is also general agreement that wireless has an upper threshold for use. (Damn you Shannon’s Law!) Sure, AT&T has a clear self-interest in this argument, and has done a fairly lousy job to date of managing its spectrum resources as compared to Verizon (which has a better network using less spectrum). But that does not of itself make the argument untrue; it simply argues for a hard and skeptical look.

So What Should The FCC Do?

So the FCC (and possibly the Federal Trade Commission as well) should finally take that “hard skeptical look” I and others keep asking them to take. What AT&T proposes is a radical change in pricing for a critical piece of our information infrastructure on which our economy increasingly depends. But we understand virtually nothing of how these prices and policies are set. The FCC has tremendous authority to investigate what is going on, whatever ultimate authority it may have to regulate in this area.

I would like to think, given the emphasis in the Communications Act and the Fair Trade Act, that the American People have a right to know whether or not they are getting ripped off on a grand scale. But setting that moral consideration aside, prudence dictates that those agencies charged with promoting broadband, promoting competition, and protecting consumers at least understand what is going on in an area increasingly critical to our lives. As long as these agencies grant consent via silence, companies like AT&T will keep looking for revenue — that being what companies do. Even if we do not intend to regulate such conduct, we ought to at least have some understanding of what is going on and its potential impact on the digital economy and the future of civic engagement.

Seriously FCC, would it kill you to at least ask the right questions before things visibly fall off a cliff? Maybe I’m wrong and this path doesn’t take us off a cliff at all. Maybe — as AT&T and others keep insisting — this is what keeps us from driving off a cliff as demand for wireless exceeds capacity. Either way, shouldn’t we have at least some sense of where we are likely to go rather than simply hoping it all works out?